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Investing By Design: Parallels Between Architecture And Investing

[drizzle]As a child, I dreamed of becoming an architect. I had a drafting table by middle school and took drafting classes through high school. After high school graduation, I was one of 30 or so students selected for Penn State’s architecture program and later interned for an architectural firm based out of a Frank Lloyd Wright home in New Jersey while home for the summer.

What appealed to me about architecture was the combination of creativity and problem solving it required. Luckily for me, this combination of skills has applications outside of architecture as well. Successful investing requires creativity in problem solving and independent thinking. It requires a child-like curiosity. And it requires the humility to know when you are wrong, or as Frank Lloyd Wright once said, “Early in life I had to choose between honest arrogance and hypocritical humility. I chose the former and have seen no reason to change.”

My home office today is littered with Lego Architecture sets. A Cut & Assemble model of Frank Lloyd Wright’s Robie House rests on the conference table in my office. But the majority of my time is now spent constructing different types of models.

Much has been said about Charlie Munger’s approach to Worldly Wisdom. Munger suggests that leveraging different models from different disciplines can improve the decision-making process. A broad array of experiences allows us to think more broadly. And thinking more broadly allows us to become better investors. This piece aims to make some of those connections presented by author Matthew Frederick in 101 Things I Learned in Architecture School, published by The MIT Press in 2007.

“The most effective, most creative problem solvers engage in a process of meta-thinking, or thinking about the thinking. Meta-thinking means that you are aware of how you are thinking as you are doing the thinking. Meta-thinkers engage in continual internal dialogue of testing, stretching, criticizing, and redirecting their thought processes.” 1

The best investors are aware of how they are thinking. Martin Fischer, a German-born American physician and author advised, “A good teacher must know the rules; a good pupil, the exceptions.”

Tim Ferriss describes Meta as learning to mimic the world’s fastest learners. Focus on the extremes, “because if we understand what the extremes are, the middle will take care of itself.” In other words, the extremes inform the mean, but not vice versa. Fredrick describes three levels of knowing – simplicity, complexity, and informed simplicity. As Frank Lloyd Wright proposed, “Less is only more where more is no good.”

Every idea must be subjected to probing and testing. Asking the right questions is critical. I keep four questions on my whiteboard at all times: What do I really know? What don’t I know? What do I really need to know that I don’t know? How do I learn that? Successful investing requires an insatiable desire to learn combined with the patience to do nothing. A disciplined research process will uncover plenty of good businesses, but more research will not make those businesses available for sale at attractive prices.

It is hard to sit on your hands and remain rational but successful investing requires more waiting than doing. New ideas can appear more appealing than existing ones, but rarely offer a large enough benefit to justify new investment given limited capital.

“Draw hierarchically. When drawing in any medium, never work at a "100% level of detail" from one end of the sheet toward the other, blank end of the sheet. Instead, start with the most general elements of the composition and work gradually toward the more specific aspects of it. Begin by laying out the entire sheet. Use light guide lines, geometric alignments, visual gut-checks, and other methods to cross-check the proportions, relationships, and placement of the elements you are drawing. When you achieve some success at this schematic level, move to the next level of detail. If you find yourself focusing on details in a specific area of the drawing, indulge briefly, then move to other areas of the drawing. Evaluate your success continually, making local adjustments in the context of the entire sheet.” 2

When researching potential investments, start with the basics. It is all too easy to get lost in the details. Investors must remain focused on the big picture, understand the key components of the thesis and flush out only those factors that have the greatest impact on value. The first bullet on our investment checklist reads as follows, “Explain how the business makes money to a fifth grader.”

Before interpreting any piece of new information, review the initial thesis. Doing this, before the release of new information, helps to dampen white noise, which can obscure clear thought. We keep an updated summary of every position in the portfolio, which includes an overview of the thesis, risks, and milestones to monitor which might suggest deviation from our original thinking. All new information is assessed relative to the thesis.

When an investment problem is so overwhelming, don’t wait for 100% clarity before beginning your analysis. Start with the most general elements and work gradually toward the specifics. In his classic, Zen and the Art of Motorcycle Maintenance,3 Robert Pirsig recalls how a student in his creative-writing class struggled to write a 500-word essay on the United States. He tells her to start with the upper left-hand brick of the opera house. Puzzled, she goes away, sits in a coffee shop, starts writing about the brick, and couldn’t stop writing. Within every large problem are many smaller problems struggling to get out. Use Pirsig’s brick to break down big problems into smaller chunks.